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A Structural Approach without Path Dependency

Ryoichi Ikeda and Takao Kobayashi
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Ryoichi Ikeda: Graduate School of Economics, University of Tokyo
Takao Kobayashi: Faculty of Economics, University of Tokyo

No CRRF-J-038, CARF J-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a structural model to price credit risk of firms with short-term and long -term debts. In Ikeda, Kobayashi, and Takahashi (2005), since it assumed that the short-term debt is refunded by issuing a new short-term debt only, the future face value of the short-term debt depends on the path of asset value, which makes analysis very complicated. In order to avoid the problem, we build a new model without path dependency by assuming the future face values of short term debts to be fixed. Furthermore, by the improvement of the model, we show that the model can apply to the pricing of credit derivatives, and present the example of the pricing of a convertible bond.

Pages: 28 pages
Date: 2007-07
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